Taking tolls on the Information Superhighway

Perhaps the most remarkable feat of the early cable television era was the ingenious way that Tele-Communications Incorporated leveraged its position as a cable distributor to become a leading player in the content business. By trading "air time" for equity in a limited channel environment, TCI built a strong base of media interests that now represent a company with a $15 billion market capitalization named Liberty Media.

Distribution is a powerful force in media-related industries. In fact, sometimes it's hard to know what is worth more: the content or the pipes that carry it. Interestingly, many Internet companies are talking about creating the "next" Liberty Media. In this light, I think it is time to take a different look at the Internet--not as a technological marvel, but as the key distribution channel for the 21st century.

To see the Internet as a distribution channel, you first must recognize the product it is transporting. At its lowest form, the product is simply bits: 1s and 0s that flow through every phone line, router, and browser. At their highest form, these bits take on a much richer livelihood representing everything from entertainment to applications to communications, and even commerce. The members of this new-age distribution channel certainly include the "pipe" players, such as telephone and cable companies, but they also represent less obvious players that have the potential to influence the flow of bits between a Web site and a user.

After all, that is the essence of this channel. Online properties have bits that they would like to share with customers, and the companies along the way have the opportunity either to aid or to hinder that process. Not surprisingly, the strongest links along the distribution chain are beginning to ask questions such as, "Do I have a right to collect fees for my participation in the network?" The simple answer to this question likely is "yes," and many high-tech companies now are jockeying to exploit that fact.

To have a better understanding of the digital distribution channel, it is important to identify the key players and their positions along the chain. The chart below outlines six key categories and the leading players in each category.

I'd like to walk through each category--from the consumer to the end destination, or digital service--identifying the strengths and weaknesses of each category with respect to the overall chain.

1. Device manufacturers. The leading Internet device manufacturers are clearly the PC makers. These companies, which are closest to the consumer along the chain, control the input devices (such as the mouse and the keyboard) and may potentially control the initial setup of the machine. However, a dispute with Microsoft over the control of start-up screens could limit this power. Other potential players here include WebTV (owned by Microsoft), other non-Wintel computer makers, and a host of network computer/set-top box companies. The device manufacturers' greatest strength is their proximity to the customer.

2. Operating systems vendors. The next logical step in the bit-chain is the operating system. This is the single most concentrated link in the chain, with Microsoft controlling 90-plus percent of the market. If Microsoft can influence bit-flow from this position, it is highly likely to reap financial reward for distribution prowess. Early initiatives include a recently disclosed program whereby Net access providers will pay for choice placement inside of an Internet setup wizard, and Microsoft will receive bounties. Content providers also have done deals with Microsoft to ensure that they will be included as "active channels" embedded in the operating system desktop.

3. Access software vendors. In this category, the obvious leaders are Microsoft and Netscape. One might also include AOL, as software on the desktop does enhance the experience. The power at this point in the chain is obvious, as embedding links in the browser is a clear way to influence bit flow. Both Microsoft and Netscape have proved this model by negotiating with content providers for premier placement within their bookmarks or channels. By integrating the browser with the operating system, Microsoft could theoretically thwart the power of other players in this market. Not standing idly by, Netscape has decided to meld its access software with its search site (these groups now report to the same boss)--an interesting move that puts them in a very similar position to AOL.

4. Internet service providers. ISPs control a portion of the channel that many of the other players do not want to touch: the capital-intensive infrastructure. One might assume this barrier to entry would guarantee them influence and power. However, service providers have had a hard time establishing control. This could change on three fronts. First, many ISPs are entering marketing arrangements with search sites to leverage their feet-on-the-street (physical) distribution. Second, as the ISP market consolidates, a few larger players will have much more influence on the overall system. Last, there is a high likelihood that ISPs could one day sell priority queuing rights to destination sites. This would mean that certain bits would always get preference at congested routers along the Internet, resulting in a better experience for the consumer.